Most US firms paid no income taxes in '90s

More than half avoided levies during boom years

By Warren Vieth, Los Angeles Times | April 11, 2004

WASHINGTON -- More than half of US corporations paid no federal income taxes during the boom years of the late 1990s, and those that did were able to shelter much of their income, according to congressional accountants.

The report by the General Accounting Office raises questions about whether the corporate income tax burden is too light and distributed unequally. It could undermine arguments that US companies are overtaxed and provide ammunition to politicians and activists who claim companies are using loopholes to avoid paying their fair share.

"This describes a problem in the corporate tax system in which a good many of these companies are avoiding any tax obligation at all," said Senator Byron L. Dorgan, a North Dakota Democrat and former state tax commissioner who requested the GAO study. "We've got a bad tax law that tells ordinary folks, `You pay up,' and allows some of the largest enterprises to avoid paying."

The share of tax receipts paid by corporations has been declining for decades, US government figures show. But it has been falling at an even faster rate in many other countries, said Gary Hufbauer, senior fellow at the Institute for International Economics, and any attempt to raise corporate taxes or close loopholes in this country runs the risk of making US companies less competitive in world markets.

"When you get a report like this people think, gee, they're getting away with murder," he said. "But most of the murder they're getting away with was deliberately designed by legislatures in response to competitive concerns. This is the result."

The GAO report showed that 61 percent of US corporations paid no federal income taxes from 1996 through 2000, a period of rapid economic growth and rising corporate profits.

An estimated 94 percent of US corporations reported tax liabilities amounting to less than 5 percent of their total income in 2000. The corporate income tax rate is ostensibly 35 percent, but companies are able to reduce their effective burden by claiming various deductions and credits.

US companies paid an average of $11.88 in corporate taxes for every $1,000 in gross receipts, the study said.

Small corporations were more likely to avoid taxation than large ones, it showed. About 38 percent of big companies (those with more than $250 million in assets or $50 million in revenues) paid no taxes during the five-year period.

Foreign-owned companies fared better in some respects than their US-based competitors. The report found that 71 percent of foreign-controlled corporations paid no taxes on their US income, while 89 percent had liabilities of less than 5 percent of their income.

The GAO didn't attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward from previous years, and sufficient credits to offset any tax liabilities. In addition, it said improper pricing of transactions between US and foreign operations could contribute to tax avoidance.

The findings feed into a broader political debate over taxes. President Bush and many Republicans have been working to reduce corporate taxes, arguing that tax cuts would make US companies more competitive globally and better able to create jobs at home.

Democratic challenger Senator John F. Kerry cited the GAO findings Tuesday during a rally on the banks of the Ohio River in Cincinnati, expressing outrage that many companies were paying no taxes despite productivity-driven profit gains.

Yet even Kerry has advocated an across-the-board reduction in corporate taxes, although he has called for closing loopholes that may encourage US companies to move jobs overseas.

The percentage of federal tax collections paid by corporations has tumbled from a high of 39.8 percent in 1943 to a low of 7.4 percent last year. It ranged from 10 percent to 11 percent in 1996-2000, the period studied by the GAO. But since World War II, the share paid by individual income tax filers has remained relatively stable, bouncing between 40 percent and 50 percent. Most of the difference is explained by higher payroll taxes for Social Security and Medicare.